Divisors and Multipliers
If you watched Obama's speech about economic stimulus today, you heard him call for a $775 billion dollar stimulus plan over two years to reinvigorate the economy and reduce the output gap (the difference between what the economy can produce and what it does produce). Unfortunately, the Congressional Budget Office recently analyzed that over the next two years, the economy will suffer a $2.4 trillion output gap - nearly 3x the size of Obama's recovery plan.
Now economic stimulus has different multiplier effects, which means for every dollar of stimulus it closes the output gap by some multiple of that amount. But how that stimulus is spent changes the multiplier effect. For example, public infrastructure spending has a multiplier effect of approximately 1.5. This type of spending accounts for about 60% of Obama's plan. The other 40% is tax cuts, but which taxes are cut also affects the multiplier. A payroll tax cut has a multiplier of approximately 1.2-1.3, while business tax cuts have multipliers =< 1.0. Fully 1/3 of Obama's tax cuts are business, which accounts for $100 billion overall.
The low-ball dollar amount, and business tax cuts are an attempt to court Republican votes and support for his economic plan. The stated goal is to pass the stimulus with 80 bipartisan Senate votes. But Obama's political strategy is misplaced. First, Repbulican minority leadership has made obstructionism a public part of their strategy to undermine Democrat effectiveness. Secondly, even if Obama's plan gets the 80 votes, if it's too weak to produce the desired results, Democrats as the majority party will singularly suffer the blame. And the public, while worried about the deficit, cares more that something be done. With the momentum of the election, appeasing Republican politicians should not be a concern; saving the economy should be.
Now economic stimulus has different multiplier effects, which means for every dollar of stimulus it closes the output gap by some multiple of that amount. But how that stimulus is spent changes the multiplier effect. For example, public infrastructure spending has a multiplier effect of approximately 1.5. This type of spending accounts for about 60% of Obama's plan. The other 40% is tax cuts, but which taxes are cut also affects the multiplier. A payroll tax cut has a multiplier of approximately 1.2-1.3, while business tax cuts have multipliers =< 1.0. Fully 1/3 of Obama's tax cuts are business, which accounts for $100 billion overall.
The low-ball dollar amount, and business tax cuts are an attempt to court Republican votes and support for his economic plan. The stated goal is to pass the stimulus with 80 bipartisan Senate votes. But Obama's political strategy is misplaced. First, Repbulican minority leadership has made obstructionism a public part of their strategy to undermine Democrat effectiveness. Secondly, even if Obama's plan gets the 80 votes, if it's too weak to produce the desired results, Democrats as the majority party will singularly suffer the blame. And the public, while worried about the deficit, cares more that something be done. With the momentum of the election, appeasing Republican politicians should not be a concern; saving the economy should be.